Why is money alone not enough to develop a European electricity grid?

Achieving a climate-neutral European economy and catering for increased electrical demand require a major expansion of electricity networks. Moreover, new off-shore, cross-border and within-country grid connections will be needed to integrate electricity from renewable sources, especially as much of Europe’s renewable energy potential is located far from industrial and population centres. Estimates of the required electricity grid investment reach up to €100 billion per year, although more economically efficient options may be feasible.

But simply investing more tax or consumer revenue into the current regulatory system is unlikely to deliver efficient results. Whilst this system was intended to deliver operational efficiency and savings for consumers, we now need a system that is better at driving efficient investments in an evolving interconnected electricity system.

The existing system needs to be better run – ideally at a European level – in order to get as much value as possible from the existing capital stock. Putting the right wires, in the right place, at the right time, requires a European approach to electricity system design. This should lead to some top-down grid infrastructure planning focused on European welfare. To deliver these improvements quickly, the incentives for stakeholders need to be readjusted, and those who lose out – eg consumers who may see price increases due to new connections with countries with higher electricity prices – may need to be temporarily compensated.

If we get grid investment wrong, either by not expanding the grid enough to facilitate the benefits of the internal electricity market, or by building a grid that is too expensive, consumers may face escalating electricity costs. At worst, higher costs could delay electrification, leading to less electricity consumption to fund expensive generation and grid assets and increasing per unit electricity costs even further.

Developing a workable European framework for grid investment demands heavy political lifting – but without it, electricity costs will not come under control.

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